When bad things happen to great companies (or how to explain mediocrity)

By Ed Tiryakian

Recently, Apple and Google have seen selloffs of 15%. Blame it on disappointing earnings, fiscal cliff or pre-election trepidation. Is it time to buy the dip and add these two technology bellwethers to your portfolio or is it time to take some profits?

Everyone owns Apple
/quotes/zigman/68270/quotes/nls/aaplAAPL. Almost 2,000 institutions own the stock and with an average price estimate of $785, this represents a 30% increase from here. There are high estimates of well over $1,000 making it the first trillion dollar company. Apple trades with a forward P/E of 10 and has 50% earnings growth. With iPads, iPad minis, iPhones, iPods, Nanos, and the eventual iTV, how can you not own the stock?

Google
/quotes/zigman/93888/quotes/nls/googGOOG is 84% owned by institutions with an $800 estimate (20% from current price) and high estimates of over $1,000. Google is the dominant search engine and receives over 1 billion requests per month, owns Android operating system, Motorola mobility, You Tube, Google Maps, Nexus, Google TV, Google Chrome, etc. With a forward P/E of 14, and revenue growth above 40%, what can possibly go wrong?

History offers some valuable insight into “must own” stocks. In 1999, Microsoft and General Electric were two such stocks. Microsoft
/quotes/zigman/20493/quotes/nls/msftMSFT was led by Bill Gates and as the dot-com/ Internet era emerged, the trend was clear that personal computers were not just for work anymore and Microsoft with their Windows operating system and Internet Explorer were poised to be the dominant player in the PC explosion. Microsoft traded with a market cap of over $600 billion, (just eclipsed by Apple as the most valuable company in history) and an eye popping P/E of 49 in 1999. During the ‘90s, Microsoft outperformed the Nasdaq index by a mind-numbing 8,400% and seemed relatively cheap to an index with a P/E of over 100.

GE
/quotes/zigman/227468/quotes/nls/geGE was founded by Thomas Edison and represented the Clinton-era resurgent U.S. economy. GE had dominant footprints in appliances, financial services, media (NBC), defense, health, energy etc. and was the definition of the multinational conglomerate that led the industrial boom after WW II. At the helm was Jack Welch. GE had a market cap of $500 billion and traded with a stratospheric P/E of 46. The S&P had a P/E of 45 and GE had outperformed its index by over 500%

Today, how have those core holdings done? Microsoft is down over 50% since Jan. 2000 with the Nasdaq down about 20%. GE is down over 60% with the S&P about flat. Two major similarities emerge to explain the demise of the once “must own companies.”

At the same time that Bill Gates, one of Time’s “most influential people of the 20th century”, named Steve Ballmer as the new CEO, Microsoft stock price peaked. Then in April of 2000, Microsoft lost a major antitrust case and was ordered not to bundle Internet Explorer with Windows. Suddenly, MSFT had lost its stranglehold, forever altering MSFT’s multiyear growth plans. With no visionary at the helm, Zune was not the answer.

GE stock peaked in October of 2000 with the announcement of their proposed mega-merger with Honeywell. This would guarantee GE’s dominant market presence and earnings trajectory for decades. A month later, it was announced that Jeff Immelt would be the new CEO to succeed Jack Welch, “the manager of the century” according to Forbes. In July of 2001, the Honeywell merger was disallowed based on antitrust concerns, severely altering GE’s strategic planning. Once again, no visionary at the helm to steer the ship through troubled waters.

So what about our current great “must own” companies, Google and Apple?

Apple recently lost Steve Jobs, its visionary who transformed it into the cool computer/electronics/smartphone company that it is today. Tim Cook is a steady leader, but you cannot replace a once-in-a-lifetime visionary and recent product launches are part of the Jobs legacy. Government action on e-Books was an industry issue but Apple Maps and bundling might be a problem worth watching.

Google’s management has remained largely intact with Brinn, Page and Schmidt in their same roles since the IPO of 2004. But of great concern, it is becoming apparent that an antitrust case is coming against Google for bundling products through its search engine, by the Federal Trades Commission and also by the EU. Now why does that sound so familiar?

The greatness of a company has many components both tangible and intangible and I teach my students that ultimately, a stock is worth what someone pays for it.

I am not sure if Apple and Google are must owns but I do know that UCLA was never the same without John Wooden and Duke will never be the same after Coach K.

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